{"id":97775,"date":"2020-01-14T17:38:10","date_gmt":"2020-01-15T00:38:10","guid":{"rendered":"http:\/\/www.lankaweb.com\/news\/items\/?p=97775"},"modified":"2020-01-14T17:38:10","modified_gmt":"2020-01-15T00:38:10","slug":"the-proposed-banking-act-and-vital-areas-to-be-considered-in-the-role-of-the-central-bank-part-1","status":"publish","type":"post","link":"https:\/\/www.lankaweb.com\/news\/items\/2020\/01\/14\/the-proposed-banking-act-and-vital-areas-to-be-considered-in-the-role-of-the-central-bank-part-1\/","title":{"rendered":"THE PROPOSED BANKING ACT AND VITAL AREAS TO BE CONSIDERED IN THE ROLE OF THE CENTRAL BANK (PART 1)"},"content":{"rendered":"

BY EDWARD THEOPHILUS<\/strong><\/em><\/span><\/h2>\n\n\n

It\nis a pleasure to hear that Prof.W.D.Lakshman, the governor of Central Bank\npublicly announced that a new banking act will be enacted in 2021.  According to news reports, the following\nareas would be the major consideration in the proposed legislation. However,\nthe governor\u2019s statement did not give clear information on whether the proposed\nact would be an admixture of all enactments since the establishment of Central\nBank on the advice of John Exter and the law relating to negotiable instruments\nwill be included to the proposed legislation. \nCentral Bank has accounts of government departments with cheque books\nand if the funds transferring of the treasury continue, it would be useful\nenacting of law relating to the negotiable instrument in Sri Lanka.  <\/p>\n\n\n\n

I\nhave recently published several articles regarding banking operations in the\nLanka web and pointed out significant issues in banking operations in the\ncountry.<\/p>\n\n\n\n

  • Approval for\nestablishment of branches and banking outlets <\/strong>\u2013\nThis is a vital activity in the trading banks with the approval of the central\nbank and it is subject to the regulation of Central Bank.  It is observed that the Central bank of Sri\nLanka permitted many banking outlets for domestic and foreign-owned without\nconsidering capital requirements consistent with the dynamic economic\nenvironment and in this process, the regulatory authority has less emphasized\nthe possibility of insolvent threats. The proposed banking act should focus to\nincorporate regulations rationally thinking about this area.  What would be the future regulation regard to\ncapital requirements? It is essential to cover the proposed legislation and it\nshouldn’t be too flexible and rigid as the change in the economic environment\nneeds direct involvement of the central bank and changing regulation from time\nto time.  <\/li><\/ul>\n\n\n\n

    In the Western countries, population\ndensity also considers in opening branches of banks as people in the rural area\nneeds banking services.  Foreign banks\nmay not involve in the area and domestic banks should concern and be regulated\nby the banking act and should not allow opening branches like emerging\nmushrooms. <\/p>\n\n\n\n

    Did\nforeign banks bring enough capital to operate in Sri Lanka as a registered bank\nin the country or they operated as a branch in Sri Lanka covering or showing\nthe capital structure of the head office overseas? BIS regulations regard\ncapital adequacy concerns on this matter. \nForeign banks or branches need to maintain risk-weighted capital\nregulation of Bank for International Settlements.  In this connection think about the experience\nof Bank of America branch in Sri Lanka and later the business operations of BA\ntook over by Mercantile credits which also bankrupted.  The capital adequacy of domestic banks, which\nwere emerged like mushrooms after 1978 seems a question and practical\nexperience shows that they have not maintained adequate capital and this area\nmust be strictly covered by the proposed act. Credit demand and quantity\nrapidly increase due to four main reasons, inflation, increase in business cost\nand government promotion for business investment and expansion of the existing\nbusiness. <\/p>\n\n\n\n

    When a person visits a rural town, it\nis seen that so many bank branches from various banks and they compete without enough\nbusiness to distribute among branches. Resulting allowing many bank branches,\nnon-bank finance institutions it seems that an intense competition between each\nother and competition is good environment which generates benefits to\ncustomers, but in Sri Lanka, it is not happening because branch managers have\nno authority to give benefits to customers regarding the price of loans and\ncharges relating to non-credit business and other transactions  Bank managers in Western countries have\nlimited power and electronic technology supported to reduce staff in rural\nbranches and reduce the delegated authority of rural managers to perform such\nfunctions by regional managers and officers in head office. <\/p>\n\n\n\n

    Head Office authorities scare to\ndelegate more power to branch managers, one reason is it may encourage credit\nfrauds and other malpractices. The cost of branch management has skyrocketed\nand this situation has created to implement weak regulation or neglecting\nregulation of the Central Bank especially in exchange, credit and other\nrestrictions. The power to make strict regulations is needed for the central\nbank to control unnecessary competition and rigid regulation also needed for\nthe approval of the establishment of branches and banking outlets. <\/p>\n\n\n\n

    The Central bank also needs to\nregulate the operation procedures of trading bank branches although it is the\nrole of trading bank head office. When opening branches by trading banks should\nnot allow opening branches of several trading banks in small townships, like in\nthe Western countries trading banks can agree with banks open one branch in\nsmall rural towns to provide the services to the community in the area. This\npractice doesn\u2019t appear working in Sri Lanka despite it is a good policy to be\nadopted.<\/p>\n\n\n\n

    Central bank regulation should direct\ntrading bank branches to maintain branch liquidity requirements as a strategy\nfor the effective management of banks. Bank liquidity management is the\nresponsibility of individual trading banks and many bank executives have no\nclear understanding of this strategy and branch managers have not been trained\nby the training department how to manage the money base of a branch. Liquidity\nmanagement is a broader concept in foreign countries, but simply, it could\nconsider that the money base of a trading bank shows management stewardship of\nbranch managers and the reconciliation of money base with financial assets\nminus liabilities of the branch would be easily supported to successful\nliquidity management of the entire bank. The weak bank liquidity management has\nforced many trading to borrow from overseas pushing the indebtedness of the\ncountry.  Therefore, Central Bank should\nconcern about this matter as regulatory authority and prudence controls will be\na useful measure to play a good regulatory role.<\/p>\n\n\n\n

    • Strengthening Consumer\nProtection <\/strong>\u2013 Foreign countries have banking\nombudsmen for this purpose and customers can make direct complaints to the\noffice of banking ombudsmen if individual banks disregard customers’\ncomplaints. Customer complaints might be a pain to the head office and the\ncredibility of a bank.  The culture of\nSri Lanka is the bank executives show the public that they are superior in\nknowledge and practice. It is not a truth. \nSri Lanka has no such an institution for consumer protection purposes.\nIf anyone investigates the history of consumer protection it could be found\nthat many banks disregarded in practice and acted like a bull in a clay utensil\nshop.  In addition to this office, the\nWestern countries appoint commissions for banking inquiry and in Australia\ninvestigations made on several occasions by banking commissions.  The proposed banking act needs to considered\nfor establishing a Banking Ombudsman Office and giving authority to Central\nBank to appoint a banking Inquiry Commission to investigate issues from time to\ntime.<\/li>
    • Deposit Insurance<\/strong>\n\u2013 This is a good idea but the problem that needs to consider is who will pay\nthe insurance premium.  It shouldn’t be\nlike a credit insurance system, which creates counterfeit obligations to\ncompensate deposit owners and liability to make profits to insurance companies\nout of hard earn money from poor people. Go back to the case of the Leeman\nBrothers. Sometimes banks can take the balance of deposit holder until the\naccount gets nil balance and in the case of current accounts or cheque accounts\nbanks may get insurance premium overdrawing accounts. If the bank pays\ninsurance premium it would cost to the bank and impact on the profitability of\nbanks. If it shifts the cost to customers it would be an additional cost to\ncustomers like debit tax and the cost of collecting premium may be an\nadditional cost to the bank.  <\/li><\/ul>\n\n\n\n

      The deposit insurance program has a\npositive aspect and if banks work like custodians of customers to protect\ncustomer deposits, especially banks make good decisions in the process of\nlending business considering they lend their own money, it will protect\ncustomer deposits. The experience of Sri Lank has proved that bank executives\nhave not worked as custodian of customer deposits and made bad lending\ndecisions without protecting customer deposits.<\/p>\n\n\n\n

         Will\ndeposit insurance promote bank employees to cheat customer deposits with an\nexpectation that insurer will pay for damages when they cheat customer\ndeposits. What would be the answer? (Continue in Part 2)<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

      BY EDWARD THEOPHILUS It is a pleasure to hear that Prof.W.D.Lakshman, the governor of Central Bank publicly announced that a new banking act will be enacted in 2021.  According to news reports, the following areas would be the major consideration in the proposed legislation. However, the governor\u2019s statement did not give clear information on whether […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":true,"template":"","format":"standard","meta":{"footnotes":""},"categories":[124],"tags":[],"class_list":["post-97775","post","type-post","status-publish","format-standard","hentry","category-edward-theophilus"],"_links":{"self":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts\/97775","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/comments?post=97775"}],"version-history":[{"count":0,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts\/97775\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/media?parent=97775"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/categories?post=97775"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/tags?post=97775"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}